Quote of the Day (Robert Heilbroner, on Stopping Inflation)

“Although no single coherent theory of inflation commands the assent of the economics profession, there is a general recognition that inflation is the consequence of a profound and probably irreversible change in the social and political fabric of capitalism. And with this recognition has come a change in attitudes about stopping inflation. The idea of stopping the rise of prices dead in its tracks may still be a popular political slogan, but it has lost credence among economists generally. For short of bringing about a real depression or imposing severe wage and price controls, no one has a credible program for bringing the inflationary process to a complete halt. Instead economists ask How much inflation can we afford? and How can we limit its damage?”— American economist and historian of economic thought Robert Heilbroner (1919-2005), The Worldly Philosophers: The Lives, Times And Ideas of The Great Economic Thinkers, Fifth Edition (1980)

Shortly after this edition of perhaps Heilbroner’s best-known book appeared, Federal Reserve chairman Paul Volcker embarked on what the economic historian called “stopping the rise of prices dead in its tracks.” 

The move, propelled by the 1979 oil crisis, raised the Fed’s interest rate to nearly 20 percent in 1981—shock therapy that finally brought inflation down, but at the cost of a recession, rather than the full-scale depression feared by Heilbroner.

For the next 40 years, the United States enjoyed a respite from rampant inflation, courtesy of deregulation, cheap goods from foreign markets, and technology that Fed Chair Alan Greenspan told Congress in 2005, “elevated the growth of productivity, suppressed unit labor costs, and helped to contain inflationary pressures.”

The situation was so unusual that this February 2018 post from the Federal Reserve Bank of St. Louis worried about the implications of very low inflation.

The pandemic, which resulted in disrupted supply chains from abroad and greater government spending to stimulate the economy, ended what increasingly looks like a holiday from history.